FMCG

by Greg Thain

  The International division contributed less to the overall sales increases load – up by just 6% on the year - it was nevertheless instrumental in improving the company’s overall margin by adding a full percentage point to operating profit margin. The transformation of General Mills from a North American operator to a global company was still by no means complete. But Pillsbury had accelerated the shift substantially. The company now had 30 plants and 9,000 employees generating nearly $2 billion in non-US sales, half a billion up on the previous three years and a five-fold increase since the year before the merger. Not only were the company’s US brands being taken to new markets - Nature Valley bars were launched in Europe and India - but indigenous overseas brands such as Wanchai Ferry appeared not only in Asian Taiwan but also in European France. Cereal Partners Worldwide made a significant acquisition, buying Australia’s Uncle Toby’s brand, making that country its second-most-important market after the UK.

  2007

  New President and CEO Ken Powell now added brand building to the existing list of key drivers, and not before time. Including General Mills’ 50% share of the volume sold through Cereal Partners Worldwide, worldwide cereal sales exceeded $3 billion in a category, which absolutely requires committed brand building for long-term success. The Big G range in the US finally returned to growth, if only by just over 2%, and was in any overshadowed by first Canada, which achieved more than 6% and then by Cereal Partners Worldwide at with over 18%, both with the same range. Clearly, General Mills needed to rely less on discounting its cereals and more on improving their relevance. Pointing up this fact, many of the new products launched in the previous year were actually nutritionally improved versions of older major brands. And they were proving successful in attracting new users, which clearly indicated the strategic way forwards. The success of Cascadian Farm organic cereals acquisition made exactly the same point, growing by more than 50% in the year.

  So, nutrition became a new lens through which the company began to look at its total global sales, a fact that the new divisions in its portfolio duly reflected:

  · Inherently Nutritious Categories – 40% of sales (yoghurt, soy, organic and vegetables, ready-to-eat cereals)

  · Better For You Choices – 13% of sales (ready-to-serve soup, snacks)

  · Quick and Convenient Options – 47% of sales (refrigerated dough, dinner mixes, dessert mixes, Mexican, ice cream, frozen pizza and snacks)

  It was perhaps somewhat generous – even misleading - to include the entire range of ready-to-eat cereals in Inherently Nutritious when it included such offerings as Reese’s Puffs and Lucky Charms. While offerings such as Yoplait Light (up another 20% in the year) and Nature Valley were guaranteed to grow, many of the offerings in Quick and Convenient were obviously vulnerable to healthy eating concerns, so new options such as lower-calorie, lower-sugar or lower-fat versions of existing brands were clearly essential.

  2008

  This was the year that looked as if everything was coming together. Even though the May fiscal year-end temporarily protected the annual performance from the full impact of the global recession, a sales increase of 10% - over $1 billion - was impressive by any standard. Every division in the company grew by at least 5% (Big G, Pillsbury and Meals) and four by double digits (Yoplait, Bakeries & Foodservice, Snack and International). Cheerios, the largest brand in the US cereal market with a 12% share, grew by 8%. The Fibre One cereal brand was successfully extended into snack bars, muffin mixes and yoghurt. Nature Valley granola bars were now sold in 54 countries. And the ever-reliable Wanchai Ferry dumplings grew by another 30% in China as distribution was increased to more cities and regions, an increase which helped General Mills’ international division generate over one-third of the total sales and profit growth in the year.

  2009

  It was 2009 that demonstrated the true resilience of General Mills’ business: sales increased another 8% to over $14 billion. The company’s first advantage was that it operated in categories that are relatively recession-proof. Home-baking products, for example, positively thrive in tough times. Betty Crocker, Bisquick, Pillsbury refrigerated dough and Gold Medal flour enjoyed absolutely stellar years as more people baked at home. Which leads to the second strength: brands. Of the eleven categories in the US where General Mills competed, it had number-one status in eight and was a strong second in the other three.

  The company was also continuing to invest in its brands when the times were tough. Marketing spend increased by 16%, driven by a media spend more than 17% more that the previous year (which had also shown an increase). In addition, investment in the relevance and appeal of the brands by further improvements to nutritional profiles (45% of the entire product range had been improved since 2005) and continued innovation through new lines such as Macaroni Grill dinner mixes also bolstered performance. And although innovation was no longer a huge business strength – only 5% of sales came from new products within the year – those new products had the reputation of reliability – and were. Margins were flat, but were being proactively managed in the face of an overall 9% increase in input costs. The management style – the Holistic Margin Management philosophy – stressed a continual reassessment of every cost, and it worked. Longer-term trends in the food category were also being addressed, with the acquisition of Lärabar, a range of energy bars made with unprocessed ingredients. Pop Secret, the microwavable popcorn, did well too.

  The positive performance in the US Retail part of the business (at $10.1 billion and still nearly 70% of total sales) was topped up by an increasingly strong international business, driven by Asia-Pacific and South America, which increased by 16 and 22% respectively, adding 10% across the board. Häagen-Dazs, Old El Paso, Wanchai Ferry and Nature Valley were more well-established core brands building a significant overseas presence. And Cereal Partners Worldwide simply kept on keeping on. It did precisely nothing for the company’s visibility. But it did plenty for the bottom line.

  2010

  Given the previous two years, 2010 was something of a disappointment, with sales growth of only 1%, although a 51-week financial year and the loss of divested lines took 3% off sales. Nevertheless, every operating division achieved growth but bakeries and foodservice, which had a ghastly time – 14% down - as indexed products reduced prices to match falls in the price of wheat. However, the same input cost reductions, plus others across foodstuffs and manufacturing performance, plus those Holistic Margin Management initiatives, added a whopping three points to the year’s gross margin, helping to fund a 24% increase in a worldwide advertising spend of over $900 million, a $400 million increase in just three years. Significantly, the biggest marketing spend increases were in digital initiatives such as the company’s recipe website, Tablespoon.com, and in its Hispanic marketing platform, Qué Rica Vida, which was successfully building links between General Mills and Latina moms new to America, whose Hispanic consumers were outpacing everyone else with ease. Innovation there was too, once again based on sensible logical extensions to already-strong brands - Yoplait Greek style Yoghurt and Chocolate Cheerios, for example. And there was another well-conceived culturally sensitive co-branding venture, this time using the Good Earth brand to introduce new ideas.

  As far as divisions were concerned, international business once again outpaced US retail, although with typical volatility, the company’s South American business followed up the previous year’s growth with a double-digit decline. In the meantime, China was now a $350 million market for General Mills, largely off the back of Wanchai Ferry (up another 20%) and the Häagen-Dazs cafés. The growing Chinese success story also had a very useful spin-off: it was giving the company confidence in other emerging markets where it had small but growing footholds – India, Brazil and Russia, where once again Häagen-Dazs and Nature Valley were the spearheads into these markets. And whilst Cereal Partners Worldwide had nearly a quarter of the global ready-to-eat cereal market outside of North America, General Mills was perhaps rueing how the d
eal had panned out in terms of company visibility: its powerhouse cereal brands were helping build the Nestlé brand name and market clout. General Mills operating companies were missing out on the retailer access and leverage.

  2011

  For the last few years, General Mills has been relying more on price realisation and mix improvements than on organic volume growth to drive top line sales. In tough economic times, retailers, who actually hold the pricing power for major brands, almost inevitably turn to increased levels of discounting to shore up their own market shares. They refuse to accept price increases and they demand higher discounts to fund their own price reductions. General Mills, with its roster of number-one and number-two brands in the US market, is inevitably at the forefront of the pricing battle, which turned out to be the case in 2011, when discounting was widespread. The only real volume momentum in recent years had been in the more niche areas of the portfolio, such as Nature Valley and Small Planet Foods, so without pricing or volume increases much of the portfolio was becalmed. Sales on Big G cereals, Meals and Pillsbury all declined in the year and Yoplait only limped forward 1% owing to the acquisition of the Mountain High all-natural yoghurt business. Even worse, $60 million was slashed from the marketing budget to help make ends meet.

  However, outside the US Retail business it was mostly good news. The international division grew by 7%, 6% of which was volume growth in the key brands. Cereal Partners Worldwide posted a 4% gain and the substantial gross margin improvement of the previous year was held on to, albeit helped by a lower-than-average year of increases in input costs. But perhaps the most significant news was on the M&A front, where the company spent $1.2 billion on acquiring a 51% controlling interest in the Yoplait brand from the French farmers’ cooperative Sodiaal and a 50% stake in the related company that managed Yoplait’s franchise businesses in markets where it did not have a direct presence. The benefits of the acquisition were two-fold. First, General Mills as a North American franchisee for Yoplait had both yoghurt market knowledge and grocery expertise that could be helpful globally. Second, Yoplait, as the world’s number-two yoghurt brand behind Danone, would give significant critical mass to General Mills’ overseas businesses.

  2012

  On the face of it, General Mills was back in the groove as sales surged by 12% to reach $16.7 billion. However, at the macro level, all of that 12% increase was accounted for by the Yoplait acquisition: sales in the pre-Yoplait General Mills business were static. More worryingly, the static outcome was a somewhat manipulated figure - a 3% volume decline counterbalanced by a 3% gain in pricing and mix. Worse, in the US the swings were more extreme. Even the Holistic Margin Management programme was unable to contain massive 10% increase in input costs so these had been largely passed on in price increases, which in turn affected volume despite increases in marketing spend and product innovation. US volume was down by 6% but price and mix added 9%, not enough to prevent a full three percentage points coming off the gross margin. Price increases of this size on leading brands are very risky propositions; they can easily widen the price gap between branded and private label to the point of consumer disloyalty, where the brand premium simply no longer has sufficient value to persuade buyers to part with their cash. And once buyers switch to a private label, there can be no guarantee they will return when and if the price gap narrows.

  Within the product categories, innovation such as Peanut Butter Multi-Grain Cheerios and Fibre One 80 Calories kept the cereals ticking over, albeit on reduced volumes. But in the yoghurt category a gathering storm had finally broken on the Yoplait brand. Five years previously, and out of nowhere, the Chobani Greek Yoghurt brand had knocked Yoplait off its perch and become America’s leading brand of yoghurt. Despite a rapid launch of Yoplait Greek and the rolling out of Mountain High into more outlets, US yoghurt sales were down a full 5%. This pinpointed a significant chink in General Mills’ armour: innovation. The company was excellent at developing new variants of brands or making improvements to existing lines – 65% of sales that year came from products recently changed or improved in some way – but it was weak at real breakthrough innovation, innovation that changed the rules. The company had been built on the breakthrough successes of Bisquick and Cheerios; it had been completely caught out by the phenomenal rise of the Greek yoghurt.

  Internationally, matters were somewhat calmer. Yoplait was still performing well, increasing sales by 63%, primarily in Europe, now General Mills’ largest international division and generating nearly $1.8 billion out of the $4.2 billion of non-US business. China was now a half-billion-dollar market for the company as Wanchai Ferry continued to grow by double digits. Häagen-Dazs, posting another 30%, was now available in over 80 countries, growing by 16% in the year, and more Old El Paso was sold outside the US than inside. The leviathan that was Cereal Partners Worldwide continued to publicize Nestle and pump money into both company’s coffers. In India, General Mills acquired Parampara Foods, an Indian food starters business. The Indian portfolio now boasted Pillsbury Fresh & Multi Grain Atta and dessert mixes, Betty Crocker dessert mixes, Green Giant, Nature Valley and Häagen-Dazs. Oh, and Parampara.

  What Is Its DNA?

  After such a chequered corporate history - flourmills, Cabbage Patch Dolls, Chocolate Frosted Cheerios, submersible explorers, fashion, Care Bears, restaurant chains to name just a few - it would be surprising if General Mills had built up a set of fixed competencies truly embedded in the business over time and over territory. However, there are two current attributes, which have always been crucial to the company’s success. And they can be traced all the way back to the times of the company’s great visionary, James Ford Bell.

  Convenience Meals

  General Mills is clearly in the business of meals and snacks. But whilst ready-to-eat cereals are its biggest category, and it is clearly an expert in the area, the company has no real advantage over the likes of Kellogg’s and Post. The same can be said for its ice cream, snack bars and yoghurt, where it is certainly highly competent, but no more so than other global food companies. But the one category that stands out as a point of excellence for General Mills is convenient meals. General Mills has been working on convenience foods for over 40 years, since the launch of Hamburger Helper. The science behind delicious, healthy, quick and easy meals is highly complex and is not easily learnt or replicated. Many companies could have bought Wanchai Ferry and grown the Chinese business through wider Chinese distribution in China; where General Mill added huge incremental value was in re-launching the brand in new convenience formats, such as microwave options that maintain both the product consistency and deliciousness, and in developing shelf-stable versions that can be exported to markets such as the UK and US. Over the last decade, the company has also been very successful in adapting to the trend towards health and wellness in pre-prepared foods.

  Making Big Brands Bigger

  While this may sound an obvious pre-requisite for any consumer goods business, it is in fact surprisingly rare. Over time, brand portfolios tend to fragment. Old favourites sail into the sunset, as innovation pipelines churn out increasingly niche offerings. The General Mills’ portfolio, in contrast, is dominated by a small number of brands, of varying vintages, and almost all are bigger now – much bigger – than they were when they started. Gold Medal flour, Bisquick, Betty Crocker and Cheerios have absolutely maintained their relevance in consumers’ minds and their power on retailers’ shelves, not least because of an obsessive focus on consumer preference. The company goal is 60% consumer preference, which well over half of its portfolio achieves.

  Betty Crocker, the epitome of the interwar consumer society, is as relevant now as she ever was, with her own iPad app chock full of message from the nineteen Betty Crocker test kitchens that churn out 50,000 test recipes a year. Offerings such as Betty Crocker Gluten-Free Dessert Mixes keep the brand relevant, in this case to this century’s obsession with constituents, ingredients and allergies. Cheerios is America’s best-selling
cereal not for the better toys in the box but because the country still loves it and its brand extensions: the weight management offering, Multi-grain Cheerios, and the cholesterol-lowering Honey Nut Cheerios. Indeed, developing relevant brand extensions is a true General Mills’ forte, especially when it leverages its technical capabilities into other product sectors; in taking the Fibre One cereal brand into snack bars, muffin mixes and even yoghurt, for example, and the venerable Wheaties brand into snack bars with Wheaties Fuel.

  And through inspired acquisitions in the past, the original brand line of brands has been augmented by a limited line-up of equally strong offerings the company has nurtured and grown for decades: Nature Valley, Häagen-Dazs, Yoplait and the host of high-performers brands that came with the Pillsbury acquisition. General Mills has been an excellent brand custodian.

  Summary

  General Mills has had a more interesting history than most packaged goods companies. From its far-sighted formation to match the growing scale of retailers and its transition to a developer of brands that added value to the output of its flourmills, from its emergence from a somewhat wacky conglomerate period into a focused food business with an impressive range of power brands, General Mills has been one of America’s success stories. However, it perhaps can be considered as two distinct companies in one. With over $10 billion in sales in the US plus another billion in Canada and $2 billion in Foodservice and Bakeries, it is a North American powerhouse. Anyone who turns over almost $2 billion with Wal-Mart definitely gets in to see the buyer. But total sales in the rest of the world of just over $4 billion essentially make General Mills a niche player everywhere else. The growth of its Chinese business to $500 million may be laudable but, in the world’s second-largest economy, it is based on just two brands – Wanchai Ferry and Häagen-Dazs. Its Indian presence is modest, Brazil the same and Russia tiny.